1 - The learning of Biggest Investors from their Biggest Mistakes - Outlook Money
This article was published in 2001 right after the DOT-Com Crash
Key Excerpts
Rakesh Jhunjhunwala, RARE Enterprise
"You learn the stock market by trial and error. Without making mistakes in the market, you will never be able to progress in it. What’s important is to spot the mistakes, learn from them, and move on"
" Don’t be overstretched in a stock. Even if you have hit on a great idea, review your allocations in a particular stock periodically. Ideally, you should not invest more than 15 per cent of your portfolio in one stock. Overexposure can be counter-productive, more so if a stock is illiquid."
Motilal Oswal, Chairman and managing director, Motilal Oswal Securities:
"Do your homework well. While choosing a stock, you could use either the top-down approach or the bottom-up approach. In the former, you look for a good company in an industry that is doing well, say, IT. In the latter, you scout for a company with good fundamentals, irrespective of the performance of the industry or the economy as a whole"
"Don’t follow the herd. Don’t buy (or sell) just because everybody and his dog is buying (or selling)."
"Don’t buy in an overheated market and don’t sell when there is panic"
Shreekant Pandey, Director, Sundaram Newton AMC
"Sectors and stocks have cycles. Every sector–and stock–goes through peaks and troughs. Hype over a sector mostly sets in around the time it is beginning to peak. So, beware of entering at the fag end of the cycle. The top companies in the sector are the first to rise. These are followed by second-rung companies, and then junk stocks. Once the hype is over, only the top companies survive; the rest fall by the wayside."
"Assess the management. Assessing the quality of management includes studying its performance and concern for shareholders. Look for the four Cs: concern for shareholders, corporate governance, credibility and competence."
Ravi Mehrotra, chief investment officer, Kothari Pioneer AMC
"Don’t react to news in haste. Every news bite emanating from companies is fodder for market players to influence share valuations. Hence, it becomes important to differentiate between material news and information of a cosmetic nature"
"peg your investment decision to a company’s primary business, not secondary avenues that might or might not materialize."
Gul Tekchandani, Chief investment officer, Sun F&C Asset Management
"Discipline is the key. The market has a mind of its own, one which is quite likely to confuse investors. You cannot make money in the market by acting on market rumours"
"Keep track of your investments. However, investing for the long term does not mean you forget about your holding. Stay alert, and monitor your stocks with a view to improving your returns. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy."
Divya Krishnan, Chief Investment Officer, SBI Mutual Fund
"We made the right calls on growth rates in Software, but were relatively late to book profits. This was partly due to the inherently competitive nature of the mutual fund industry: since we are assessed on a quarterly basis against our peers, it’s not possible to consistently follow a conservative approach."
"Price is important. Zeroing in on a great company is one half of the investment puzzle. You also have to see whether the company is worth investing in at its current price, for that will ultimately determine your returns. Buy the right company only at the right price. Likewise, sell it when its valuations appear overstretched."
" Review and decide. Hope is an easy crutch to lean on. Pressure or no pressure, there’s always a tendency to stay invested when the going is good in the hope of making a little more money."
Kisan R. Choksey, Chairman, Kisan Ratilal Choksey Shares and Securities
"Analyse the business. Study the industry and the company thoroughly, and analyse its strengths and weaknesses. Also look at the quality of management–an over-ambitious management could consider expanding operations beyond the company’s capacity."
" Don’t shy away from booking profits. It’s important to be willing to give up on the upside to protect your downside. For, when a stock plummets from its peak, you may be caught unawares."
Darshan Mehta, Chief executive officer, Anagram Stockbroking
"Maintain a lean portfolio. Don’t grow too big for your boots. There’s no point in having a portfolio of 90 stocks if you cannot track them. If diversification is what you seek, you can achieve the objective with just 10 stocks. What matters is not how many stocks you have in your portfolio, but what kind of stocks these are. Moreover, the fewer stocks in your portfolio, the easier it is to track them."
"Don’t lose sight of your initial objective. Invest with an objective in mind. Once that objective is met, look to exit unless there are very good reasons to stay invested."
Late Parag Parikh, Chairman, Parag Parikh Financial Advisory Services
"Don’t get in at peaks. Stock markets are not always the barometer of the economy, or even of a company. With globalisation and hot fund flows, they have become glorified casinos and don’t always reflect the true worth of its constituents. Hence, always invest for the long term and avoid short-term momentum plays. Bear in mind that momentum works both ways: you could crash as easily as you soar."
"Be flexible with your investment mix. Don’t hold stocks for the sake of holding equities. Sometimes, it’s better to hold cash or debt to maximise returns. Your investment mix should reflect your perception of the market."
Dileep Madgavkar, Chief investment officer, Prudential ICICI Mutual Fund
"Commodities get lower discounting. In commodities businesses, value-addition is limited to the usage of the product. When a plant reaches its maximum capacity, the company has to invest more to set up new units to increase business. But a degree of circumspection is called for during capacity expansion because commodities are cyclical businesses."
"On the other hand, a non-commodity business like software can flourish because scalability is far easier to achieve–which is partly why the market gives them a higher discounting than commodity stocks.
Cash is king. Cash flows say a lot more about a company than the profit and loss numbers. You cannot fudge cash flows: a cash outflow is an outflow. The share price of a company is today determined by its ability to generate future cash."
Read More: https://www.outlookindia.com/outlookmoney/archive/my-biggest-mistakes-86930
2 - Don’t over analyse PE multiple - Abhishek Basumallick
Key Excerpts
"In absolutely layman terms, PE is the multiple of earnings one pays to buy a stock."
"Every asset value can be broken up into two parts—i) intrinsic value, which is derived from its tentative future cash flows and ii) transaction value, which is derived from what value someone else will pay for it in a transaction"
"As a brief aside here, this is what is happening in something like Bitcoin today. It has no intrinsic value. Its entire value is derived from the transaction value."
"A discounted cash flow method is one of the well-known and practised methods of calculating intrinsic value. You need to forecast future cash flows, possible capex, discount rate, terminal growth rate etc. if done well, is it helps in thinking through different scenarios and look at different levers that impact the cash flow of the business"
"The transaction value, on the other hand, is purely a function of demand and supply. So, if you think a Da Vinci painting (or Bitcoin or a piece of rock, whatever) will have higher demand tomorrow than supply, and more people will be willing to pay more than what they are willing to pay today, then the transaction value goes up"
"In PE as in real-life asset prices, both these components are present implicitly. Two stocks with the same earnings may have completely different PEs. That is because both their intrinsic value and transaction values could be different"
" One way to practically use the PE ratio, which I personally use, is to look at the relative PE. It is clear from history that some companies which have better governance, management, growth etc are always valued higher (that is, their transaction value is higher) relative to others"
"a way to quantify this is to look at a company's PE to the index PE. If you do this exercise, what you do is you take away the exuberance of a bull market and the despondence of a bear market and normalize the PE ratio"
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